All experienced cattlemen know cattle prices go boom to bust and back again — that's the cattle cycle. In fact, cattle and slaughter numbers, and cattle prices, are interrelated and move in a predictable nature. What's less understood is the predictability of the cyclical nature of beef cattle-price cycles.
Figure 1 presents a University of Wyoming researcher's perception of the nature of beef price cycles. While the researcher left the timeline at the bottom in abstract form, I posted some suggested years along the timeline to help readers better visualize these interrelationships.
Figure 1 breaks the beef price cycle into four stages: rebuilding, exhaustion, sell-off and the last stage.
Some fundamental factors
In studying Figure 1, one must keep in mind a few fundamental economic and production factors:
As cattle numbers go up, prices go down; as numbers go down, prices go up.
Once a rancher gets the price signal to expand, it takes three years to actually expand production. An additional heifer calf must be held back, developed, bred and its grown offspring harvested. Thus, by the time a rancher gets his production expansion in place, there's generally a new price signal to contract.
The time lag of a production expansion leads to cattle numbers continuing upward even after prices have turned down. Much of the driving force for cattle cycles comes from beef cattle's long biological cycle.
The early stages of herd expansion, which is triggered by high calf prices, leads to even fewer harvest numbers in the short term, as heifers are kept back for breeding (where we are today). Thus, there are fewer numbers to fill all the feedlots.
Let's start our study of Figure 1 by analyzing the rebuilding stage presented on the left-hand side. Low cattle numbers are pulling cattle-harvest numbers down, which pushes cattle prices upward.
Ranchers react to rising cattle prices by holding back replacement heifers, which reduces harvest numbers even more. Eventually cattle numbers grow to a point that prices peak, marking the end of the rebuilding stage.
Due to the biological lag, cattle numbers in the exhaustion phase continue to grow even though prices have begun trending down. The increased cattle numbers pressure cattle prices even lower. The end of the exhaustion phase is when cattle numbers peak.
We enter the sell-off stage when falling prices trigger a culling of the national herd. Cattle numbers drop but harvest numbers continue to rise as breeding females are culled and go to harvest.
The last stage is characterized by high harvest numbers, cattle numbers trending down, and cattle prices moving to the cycle low. The beef cycle is now complete. One can characterize Figure 1 by saying the cattle cycle caused the beef price cycle.
The last two beef price cycles
In general, all cattle prices follow the same general beef price cycle. Figure 2 summarizes the last two U.S. beef-price cycles for three weights of cattle.
The first price cycle covers the 1985-1996 period, while the current beef price cycle covers the period starting in 1997 and projected to run through 2010-2013. Indications are the last set of drought years extended the current cycle 3+ years.
The top line in Figure 2 is the beef price cycle for 500- to 600-lb. steer calves. The middle line is the price cycle for 700- to 800-lb. feeder steers, and the bottom line is the price cycle for Nebraska direct harvest steers.
The last beef price cycle Let's first examine the 1985-1996 beef price cycle. Note that the starting price levels for all three cattle groups were similarly low. As the cycle progressed, feeder-steer and feeder-calf prices climbed faster than harvest-cattle prices.
These wider price differences between weights are significant for backgrounders, stocker operators and cattle feeders. Both the buy/sell margins for backgrounded and stocker cattle, and for calf-feds in retained ownership programs grew wider. While a large buy/sell margin doesn't preclude post-weaning profits, it makes post-weaning profits more difficult.
After a double top in 1993, harvest cattle prices turned down in 1994. As harvest cattle prices peaked and fell, notice how quickly the buy/sell margins on feeder cattle closed. Finally in 1996, feeder-calf prices/cwt. were equal to or less than harvest-cattle prices/cwt. Some of the dramatic feeder-cattle price drop was due to record-high corn prices toward the end of this price cycle.
The current price cycle
The current beef-price cycle (1997 to present) has followed the same general price cycle but with more volatility (Figure 2). Sept. 11, 2001, the drought of 2002, and BSE in the U.S. all added to volatility of the current price cycle.
Nevertheless, the current cattle cycle is taking on the generally expected cyclical nature. The last half of the current beef price cycle for 2006-2014 are my projected numbers. I rely heavily on the University of Missouri and Iowa State University's Food and Agriculture Policy Research Institute for these long-run price projections.
Figure 3 presents my current beef price-cycle projections. Steer calf prices (500-600 lbs.) cycled from very low 1996 prices to record 2005 high prices. The volatility of this cycle's run-up in calf prices has left many ranchers frustrated but pleased with today's record prices. Bred-heifer prices are at record levels and herd expansion is fully underway.
My concern is ranchers, in their jubilation over today's high calf prices, might forget about the cyclical nature of calf prices. As shown in Figure 3, calf prices are projected to trend down for the last half of this current beef price cycle. The good times won't last.
Feeder steers (700-800 lbs.) tend to follow the general direction of feeder calves. Clearly the buy/sell margins have widened substantially, making it more difficult to generate post-weaning profits, even with today's record cattle prices. Feeder-steer prices are also projected to trend down in the last half of this current beef price cycle.
Annual harvest-steer prices may well have peaked in 2003-04 and will slowly trend down into the end of this beef-price cycle. My Oct. 30 short-run price projections suggest a buy/sell margin for backgrounding your 2005 calves at -$21. I also project a -$30 buy/sell margin for finishing these backgrounded feeders.
In turn, I project a -$48 buy/sell margin for calf-feds going from weaning to harvest. Figure 3 illustrates these record-wide buy/sell margins.
This all suggests it will be difficult, if not impossible, to generate any post-weaning profits with your 2005 calves — especially in the finishing phase.
The most significant implication for ranchers of the projected beef-price cycle is the projected herd-profit trend in Figure 4. Profits/cow are projected to peak this year, turning down as calf prices weaken in the cattle cycle's second half.
I project the breakeven year to be 2009/2010. Profits could be negative for the 2011-2013 period. Cash-flow projections follow the same pattern with the breakeven year projected at 2007-2008.
My conclusion from all this is that now's the time to build a financial reserve to take you though the last half of the current price cycle. The beef prices used to generate these beef price cycles are presented in Figure 5.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].